Category

Industrials Sector

Brief Industrials: Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing
  2. Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road
  3. Toshiba Machine – How Much Is It Worth?

1. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

Screenshot%202020 01 20%20at%204.38.35%20pm

This is a follow-on insight to Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road which discusses the Maeda Corp (1824 JP) hostile Tender Offer for Maeda Road Construction Co (1883 JP)

The first insight deals with the Tender Offer, and the possible responses Maeda Road might be able to call upon to defend itself.

Proper models for how this could play out would include the Itochu/Descente situation from early 2019 (see insights here), or situations such as the Steel Partners bids for Sotoh Co Ltd (3571 JP) or Yushiro Chemical Industry Co (5013 JP) in early 2014. Other models for defense reaction could include the reaction by Unizo Holdings (3258 JP) to the hostile partial offer by H I S Co Ltd (9603 JP) last summer. 

This insight deals with the Arbitrage Grids for Partial Tender Offers, the Funky Arbitrage Grids, and a discussion of how to think about front-end pricing before you have further news.

More below.

2. Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road

Screenshot%202020 01 20%20at%203.49.20%20pm

Today, construction company Maeda Corp (1824 JP) (a.k.a. Maeda Construction) has announced a Tender Offer to increase its stake in affiliate but not subsidiary 24.7%-owned Maeda Road Construction Co (1883 JP) to over 50%, at a premium of 50.0%.

This is not unexpected in the world of parent companies buying in subsidiaries in Japan as a wave of governance concern-led buy-ins and sell-downs leads the market in interesting situations (cf Hitachi, Toshiba, Fujitsu, etc). 

This one is different however.

This one is hostile. 

Maeda Road is upset, and has called on Maeda Corp to dissolve all capital ties and sell its shares in Maeda Road back to the company. 

This is where it is going to get interesting. There are options for Maeda Road to respond through a stick in the spokes of Maeda Corp’s intentions, but it is unlikely Maeda Corp will decide to cancel its Tender Offer to be launched tomorrow based solely on Maeda Road’s desire for it to go away.

Shares in Maeda Road initially jumped, before being suspended, then jumped JPY 500 to go limit up.

It looks like the Partial Tender would go through (there’s no minimum). That said, what we see today is just the beginning because to avoid seeing Maeda Corp own a greater stake, Maeda Road has to do something drastic.

As we like to say, this story could get interestinger.

3. Toshiba Machine – How Much Is It Worth?

Image 506287354101579502651759

With the news over the weekend regarding Murakami being set to launch a tender offer for Toshiba Machine shares, we spoke to the company briefly to confirm the accounting treatment of its balance sheet assets. We present our thoughts on the potential value of the company below.

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Brief Industrials: BEM: Leading Mass Transit Operator Is About to Get Huge and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. BEM: Leading Mass Transit Operator Is About to Get Huge
  2. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment
  3. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst
  4. AP Moller Maersk (MAERSKb): Assessing the Stock Price Development
  5. Shanghai International Airport (600009 CH): Best of the Breed

1. BEM: Leading Mass Transit Operator Is About to Get Huge

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We initiate coverage of BEM with a HOLD rating, based on a target price of Bt11.70 derived from a sum-of-the-parts methodology, which implies 45xPE’20E, or a 10% premium to the Thailand transportation sector

The story:

• Extensive transportation network in metropolitan areas
• Growth phase for MRT is just around the corner
• Upside from Orange and South Purple MRT lines
• Steady cash flow from toll businesses
• Plenty of opportunities for commercial development business
• Potential upside from airport-linked fast track 

Risks:  Concession termination, interest rate fluctuation and legal disputes

2. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment

Image 82467328421582070716555

Japan Airport Terminal’s operating position is interesting. The company has been making significant investments to expand its capacity for international flights, partly due to the upcoming Tokyo Olympics and thus has seen capex surge from a low of ¥4.8bn in FY03/15 to an expected ¥77bn this FY. This is likely to lead a significant surge in depreciation together with the potential for a significant increase in operating profit… if strong demand continues. Ultimately, this is the story that the coronavirus outbreak threatens, and we are concerned that the depreciation burden may be being underestimated by the market.

3. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

On February 18th, Doosan Heavy Industries (034020 KS) announced a massive restructuring plan, one of its biggest ever in its 58 years of history. As of the end of September 2019, the company had 6,784 employees, of which about 2,600 are 45 years old or more. This restructuring plan includes a voluntary ERP (early retirement program) for these 2,600 employees.

It has been estimated that nearly 1,000 employees could seek this ERP program, which would represent nearly 15% of its total workforce. Although this massive restructuring program is not good news for the employees of Doosan Heavy Industries, this should act as a positive factor on the stock price of the company since it should be able to boost its operating profit starting 2021.

The United Future Party is pro-nuclear power and if they are able to win the General National Assembly election, it would certainly have a major positive impact on Doosan Heavy Industries (034020 KS). Nonetheless, there are still nearly two months left until the election and in Korea, that is like a lifetime in political ages and so much could change during this period.

4. AP Moller Maersk (MAERSKb): Assessing the Stock Price Development

2

While the market was looking brighter in the latter half of 2019, when most of the liner companies posted profits, it has taken a U-turn since then. Stocks have been on a downwards trajectory since the beginning of 2020 amid the war rhetoric between the US and Iran in January and the negative news of the virus thereafter. In the short term, we expect volatility in liner company stock prices as the news flow surrounding the virus ebbs and flows; this also encourages investors to take positions in companies, including APMM which offers a favourable risk-reward.

5. Shanghai International Airport (600009 CH): Best of the Breed

Price%20performance

We regard Shanghai International Airport Co, Ltd. (600009 CH) (SIAC) as the best airport play in China when compared with its peers like Beijing Capital International Airport (BCIA) (694 HK) and Guangzhou Baiyun International Airport (600004 CH) given its strong competitive position, its exposure to international traffic growth in the long term and growth in non-aeronautical revenue. 

Despite its premium P/B valuation, SIAC has a better ROE and stronger profit outlook. We think this justifies the stock’s higher P/B valuation than BCIA. In earnings terms, however, it is the least expensive amongst its peers on FY21 PER. Its high international exposure may be clouded by the Novel Coronavirus Pnemonia (NCP) outbreak, but we expect SIAC to be best positioned for the revival in international traffic over the long term. 

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Brief Industrials: Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road
  2. Toshiba Machine – How Much Is It Worth?

1. Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road

Screenshot%202020 01 20%20at%203.49.20%20pm

Today, construction company Maeda Corp (1824 JP) (a.k.a. Maeda Construction) has announced a Tender Offer to increase its stake in affiliate but not subsidiary 24.7%-owned Maeda Road Construction Co (1883 JP) to over 50%, at a premium of 50.0%.

This is not unexpected in the world of parent companies buying in subsidiaries in Japan as a wave of governance concern-led buy-ins and sell-downs leads the market in interesting situations (cf Hitachi, Toshiba, Fujitsu, etc). 

This one is different however.

This one is hostile. 

Maeda Road is upset, and has called on Maeda Corp to dissolve all capital ties and sell its shares in Maeda Road back to the company. 

This is where it is going to get interesting. There are options for Maeda Road to respond through a stick in the spokes of Maeda Corp’s intentions, but it is unlikely Maeda Corp will decide to cancel its Tender Offer to be launched tomorrow based solely on Maeda Road’s desire for it to go away.

Shares in Maeda Road initially jumped, before being suspended, then jumped JPY 500 to go limit up.

It looks like the Partial Tender would go through (there’s no minimum). That said, what we see today is just the beginning because to avoid seeing Maeda Corp own a greater stake, Maeda Road has to do something drastic.

As we like to say, this story could get interestinger.

2. Toshiba Machine – How Much Is It Worth?

Image 506287354101579502651759

With the news over the weekend regarding Murakami being set to launch a tender offer for Toshiba Machine shares, we spoke to the company briefly to confirm the accounting treatment of its balance sheet assets. We present our thoughts on the potential value of the company below.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Industrials: Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road
  2. Toshiba Machine – How Much Is It Worth?
  3. TRACKING TRAFFIC/Chinese Express: December & Q4 Numbers Confirm Sharp Shift in Express Market Share

1. Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road

Screenshot%202020 01 20%20at%203.49.20%20pm

Today, construction company Maeda Corp (1824 JP) (a.k.a. Maeda Construction) has announced a Tender Offer to increase its stake in affiliate but not subsidiary 24.7%-owned Maeda Road Construction Co (1883 JP) to over 50%, at a premium of 50.0%.

This is not unexpected in the world of parent companies buying in subsidiaries in Japan as a wave of governance concern-led buy-ins and sell-downs leads the market in interesting situations (cf Hitachi, Toshiba, Fujitsu, etc). 

This one is different however.

This one is hostile. 

Maeda Road is upset, and has called on Maeda Corp to dissolve all capital ties and sell its shares in Maeda Road back to the company. 

This is where it is going to get interesting. There are options for Maeda Road to respond through a stick in the spokes of Maeda Corp’s intentions, but it is unlikely Maeda Corp will decide to cancel its Tender Offer to be launched tomorrow based solely on Maeda Road’s desire for it to go away.

Shares in Maeda Road initially jumped, before being suspended, then jumped JPY 500 to go limit up.

It looks like the Partial Tender would go through (there’s no minimum). That said, what we see today is just the beginning because to avoid seeing Maeda Corp own a greater stake, Maeda Road has to do something drastic.

As we like to say, this story could get interestinger.

2. Toshiba Machine – How Much Is It Worth?

Image 506287354101579502651759

With the news over the weekend regarding Murakami being set to launch a tender offer for Toshiba Machine shares, we spoke to the company briefly to confirm the accounting treatment of its balance sheet assets. We present our thoughts on the potential value of the company below.

3. TRACKING TRAFFIC/Chinese Express: December & Q4 Numbers Confirm Sharp Shift in Express Market Share

Dec exp asp

Headline express parcel delivery volume increased by 24.3% YoY in December, and average pricing increased by 1.9% YoY. In the main inter-city segment, which accounts for the bulk of the listed express companies’ business, volume growth was even stronger (+32.4% YoY). However, these headline figures fail to illustrate dramatic shifts in market share, and December’s nominal price increase contradicts what was reported by most companies.

Chinese express delivery leader S.F. Holding (002352 CH) reported another month of strong volume growth in December. SF grew far faster than its three China-listed peers in December, and in Q419 its parcel volumes grew significantly faster than any other listed express company. SF’s volume share gains appeared to accelerate during the fourth quarter.

We believe SF’s share gains are sustainable and unlikely to undermine profitability. Furthermore, it appears some smaller listed express companies may be stepping back from the battle for volume share. In our view, these developments are positive for SF. However, investors in recent months have failed to recognize these changes, and we retain our BUY rating on SF and our CNY 57.30 price target.

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Brief Industrials: Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment
  2. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst
  3. AP Moller Maersk (MAERSKb): Assessing the Stock Price Development
  4. Shanghai International Airport (600009 CH): Best of the Breed
  5. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?

1. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment

Image 34830963731582070716556

Japan Airport Terminal’s operating position is interesting. The company has been making significant investments to expand its capacity for international flights, partly due to the upcoming Tokyo Olympics and thus has seen capex surge from a low of ¥4.8bn in FY03/15 to an expected ¥77bn this FY. This is likely to lead a significant surge in depreciation together with the potential for a significant increase in operating profit… if strong demand continues. Ultimately, this is the story that the coronavirus outbreak threatens, and we are concerned that the depreciation burden may be being underestimated by the market.

2. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

On February 18th, Doosan Heavy Industries (034020 KS) announced a massive restructuring plan, one of its biggest ever in its 58 years of history. As of the end of September 2019, the company had 6,784 employees, of which about 2,600 are 45 years old or more. This restructuring plan includes a voluntary ERP (early retirement program) for these 2,600 employees.

It has been estimated that nearly 1,000 employees could seek this ERP program, which would represent nearly 15% of its total workforce. Although this massive restructuring program is not good news for the employees of Doosan Heavy Industries, this should act as a positive factor on the stock price of the company since it should be able to boost its operating profit starting 2021.

The United Future Party is pro-nuclear power and if they are able to win the General National Assembly election, it would certainly have a major positive impact on Doosan Heavy Industries (034020 KS). Nonetheless, there are still nearly two months left until the election and in Korea, that is like a lifetime in political ages and so much could change during this period.

3. AP Moller Maersk (MAERSKb): Assessing the Stock Price Development

4

While the market was looking brighter in the latter half of 2019, when most of the liner companies posted profits, it has taken a U-turn since then. Stocks have been on a downwards trajectory since the beginning of 2020 amid the war rhetoric between the US and Iran in January and the negative news of the virus thereafter. In the short term, we expect volatility in liner company stock prices as the news flow surrounding the virus ebbs and flows; this also encourages investors to take positions in companies, including APMM which offers a favourable risk-reward.

4. Shanghai International Airport (600009 CH): Best of the Breed

Cancellation

We regard Shanghai International Airport Co, Ltd. (600009 CH) (SIAC) as the best airport play in China when compared with its peers like Beijing Capital International Airport (BCIA) (694 HK) and Guangzhou Baiyun International Airport (600004 CH) given its strong competitive position, its exposure to international traffic growth in the long term and growth in non-aeronautical revenue. 

Despite its premium P/B valuation, SIAC has a better ROE and stronger profit outlook. We think this justifies the stock’s higher P/B valuation than BCIA. In earnings terms, however, it is the least expensive amongst its peers on FY21 PER. Its high international exposure may be clouded by the Novel Coronavirus Pnemonia (NCP) outbreak, but we expect SIAC to be best positioned for the revival in international traffic over the long term. 

5. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?

Vehicle

  • One of the big winning sectors in the Korean stock market this year has been the rechargeable batteries related stocks including Samsung Sdi (006400 KS) and LG Chem Ltd (051910 KS). In the past few days, there has been some increasing news flow in the local media regarding a potential transfer of the rechargeable batteries modules and packs business from LG Electronics (066570 KS) to LG Chem.
  • On a relative basis, this transfer would likely to have a GREATER POSITIVE impact on LG Electronics since the battery modules and packs business has been losing money in the past several years and this transfer would allow LG Electronics to reduce the operating losses from this business unit (Vehicle Component Solutions).
  • For now, nothing has been decided regarding the potential transfer of the rechargeable battery modules and packs business from LG Electronics to LG Chem. This is just in the discussion stage right now. However, this business transfer seems to make a lot of sense and one could wonder why they did not complete this move earlier (especially from the point of view of LG Electronics shareholders). 

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Brief Industrials: Philips to Divest Domestic Appliances Business – Potential for Margin Expansion and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Philips to Divest Domestic Appliances Business – Potential for Margin Expansion
  2. Recruit Holdings 3Q Update: Risks Have Started to Materialise
  3. DP World Squeezeout – Governance Discount Deserved (And Served) So Minorities Lose
  4. Vontier Corp IPO Preview
  5. BTS Group W5 Warrants Trading Imminent

1. Philips to Divest Domestic Appliances Business – Potential for Margin Expansion

Image 37876785981582011290403

  • Dutch health technology company, Philips during its 4Q2019 results release, announced that it will be reviewing options for future ownership of its Domestic Appliance business.
  • The domestic appliance business is engaged in the sale of coffee machines, air purifiers and air fryers and the company has booked the domestic appliance business under its Personal Health Segment.
  • Philips has a long history of business restructuring where it previously divested/spun-off its semiconductor, TVs and lighting businesses in order to narrow down its focus on healthcare equipment and personal health products.
  • In this insight, we take a look at the company’s Domestic Appliance business, potential valuation and the impact on Philips’ revenue and margins.

2. Recruit Holdings 3Q Update: Risks Have Started to Materialise

Download

  • Recruit Holdings (6098 JP)’s 3Q FY03/20 results show early signs of the risks that we highlighted in our previous notes materialising. In our note, Global Labour Markets Are Starting to Slow Down – Time To “Lay Off” Recruit, we suggested that Recruit’s exposure to the Japanese and global labour markets is 84% and 71% of its consolidated revenue and EBITDA, hence, with global labour markets starting to slow down, and hiring stalls, Recruit’s growth could be hampered in the medium term. Recruit’s Staffing and HR Solutions revenue decreased by 3.3% YoY and 2.8% YoY respectively in FY03/20 (cf. +1.9% YoY and +7.7% YoY respectively in FY03/19). 
  • In our note, Recruit Holdings [Alternative Data]: Should the Slowdown in Indeed Warrant a Discount?, we suggested that revenue growth of the HR Technology segment, which operates indeed.com (Indeed) and glassdoor.com (Glassdoor), would fall below 30% YoY (22%-28% YoY) for the first time in 3Q FY03/20. HR Technology segment revenue increased by c.28% in 3Q FY03/20. We believe most of this growth is due to better monetisation efforts at Glassdoor which could be maxing out soon, hence, HR Technology revenue growth is likely to be even lower over the next few quarters. 
  • We didn’t find anything exciting to look forward to on the long side from Recruit’s 3Q FY03/20 results. We believe that the market would start discounting Recruit over the next few quarters as risks (that we have highlighted above) would become more obvious. Thus, with its valuation also at an all-time high, we believe it is a good time to short Recruit. 

3. DP World Squeezeout – Governance Discount Deserved (And Served) So Minorities Lose

Screenshot%202020 02 17%20at%208.46.02%20pm

Dubai-owned ports operator DP World has been a fixture in the M&A and offshore M&A space the last decade, with a dozen and a half transactions to its credit the last 5-6yrs – all but one a purchase (it sold Chilean Puertos y Logistica last year to a unit of Caisse de dépôt et placement du Québec). The goal has been to transition away from being a pure ports operator to become the world’s leading end-to-end logistics provider.

Occasionally its deals have made really public news, in particular the pre-IPO deal in 2006 to buy The Peninsular and Oriental Steam Navigation Company (P&O), a British-owned company which operated 5 major US ports (and 16 smaller ones) which was strongly supported by the Bush administration, questioned by the Coast Guard, then in Feb 06 approved by CFIUS. Then when a US partner of P&O saw they might get forced into a partnership with DPW, they raised the issue with their Democratic Party Congresspeople, who raised a stink. DPW offered to postpone. In early March, the US House voted overwhelmingly to block the deal via a bill, and the next day, DPW effectively withdrew its bid for ownership and said it would sell the package to a US entity. It was eventually bought by AIG.

The stock IPOed in November 2007 at US$1.30/share (equivalent to US$26/share; the stock underwent a 1:20 reverse split in 2011) and then fell like a rock. Four months after listing the stock was trading 40% lower. A year after that, at the lowest point in the GFC (early March 2009), the stock traded as low as 85% below the IPO price. 

The stock took the next nine years to (impressively) climb back up to IPO price-equivalent in January 2018 before falling back by half as of yesterday.

The NEW News

Earlier today, DP World (DPW DU) made an announcement that Port and Free Zone World, a wholly-owned subsidiary of state investment vehicle Dubai World, is set to acquire the 19.55% of DP World’s shares listed on the Nasdaq Dubai (the other 80.45% is owned by the SOE). 

The Offer Price is US$16.75, which is a 28.8% premium to Sunday’s closing price of US$13/share.

The statements by the CFO and CEO point to how taking a long-term view is optimal for the company, whereas markets take a short-term view. 

“The DP World Board has concluded that the disadvantages of maintaining a public listing outweigh the benefits. Delisting from Nasdaq Dubai is in the best interest of the company, enabling it to execute its medium to long-term strategy. DP World is focussed on the transformation of the Group and takes a long-term view of investment returns and value creation. In contrast, public markets typically hold a short-term view. As a result of this gap, the DP World strategy is not fully appreciated by the equity markets, and consequently is not reflected in the company’s share price performance.”
Yuvraj Narayan, Group Chief Financial, Strategy and Business Officer of DP World

“The global ports and logistics industry has been undergoing a significant transition as a result of the consolidation of the customer base and the vertical integration of several competitors. DP World must be able to continue responding effectively to this rapidly changing landscape and to invest in the future.

Returning to private ownership will free DP World from the demands of the public market for short term returns which are incompatible with this industry, and enable the company to focus on implementing our mid-to-long-term strategy to build the world’s leading logistics provider, backed by our globe-spanning network of ports, economic zones, industrial parks, feeders, and inland transportation.

Our focus will continue to be on integrating our acquisitions with our global network of interconnected ports, logistics businesses and economic zones. DP World’s world-spanning footprint puts us in a strong position to lead the disruption of the industry creating a better future for all cargo owners through smarter trade.”
Sultan Ahmed bin Sulayem, Group Chairman and Chief Executive Officer of DP World

The statements out are what they are. Investors can ignore them. That is not what is happening here. 

The powers that be in Dubai are squeezing minorities out at a huge discount to where these assets would trade if sold on their own. It is far, far below where peers trade.

The claim that public markets cannot support such a long-term business is strange.

  • The market supports Brookfield (either Brookfield Asset Management (BAM US) or Brookfield Infrastructure Partners Lp. (BIP US)) just fine.
  • And does so with higher than the six turns of 2020e EBITDA (the debt/EBITDA ratio which DPW would have post the leveraged buyout (after it takes on an additional $8.1bn of net debt to complete the transaction and pay back the acquirer).
  • Brookfield has higher debt multiples, and trades at 2-3x the EV/EBITDA ratio and similarly high multiples of EV/EBITDA less capex) compared to DPW (depending on how you measure Brookfield EV/EBITDA, and there should be some question about that).
  • DPW has better ROA, better ROE, better ROC, and better Net Income Margins than either of the Brookfield businesses. 

The difference, of course, is investor trust in management and board governance. Minorities were basically always stuck here. And just how stuck they are/always were is shown in the call presenting the deal. There were some unhappy campers.

It is not a pretty governance picture. 

More below.

4. Vontier Corp IPO Preview

Vontier mkt

  • Vontier Corp (VNT US) is a carve-out of Fortive Corp (FTV US)‘s mobility infrastructure business. Vontier Corp is getting ready for an IPO in the next few weeks. Goldman Sachs is the sole underwriter in this deal. So far, no pricing terms have been disclosed but it is estimated that the company could raise as much as $1 billion.
  • Vontier Corp provides numerous equipment, software, and services that aim to service the mobility infrastructure industry worldwide. The company supplies numerous solutions including advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management software solutions. 
  • The company generated sales of $2.8 billion in 2019, up 4% YoY. From 2015 to 2019, its sales increased by 5.4% CAGR. From 2015 to 2019, the company generated a stable and relatively high average operating margin of 19.2%. 

5. BTS Group W5 Warrants Trading Imminent

Screenshot%202020 02 14%20at%203.07.06%20pm

As discussed in BTS Group W5 Warrants Coming published in mid-December, the W5 warrants would start trading sometime in the new year of 2020. The discussion point on the insight a week later noted that the first day of trading would be 17 February. 

Helpfully, because you know the strike, you had a 14-month option at the time – not a 12-month option. The shares reacted. The rights went ex- on the 13th of December (the big red candle dropping from the high in mid-December), and for whatever reason, the stock actually rose on the open before falling almost 10% that week. 

source: tradingview.com, Quiddity

Since then, economic figures and forecasts have been non-salutary, and the onset of the novel-coronavirus-2019 has sharply curtailed Chinese outbound tourism, which has dampened the outlook further. The interim dividend for the Apr-Sep 2019 fiscal half went ex- on 28 January, and Q3 earnings released Friday. 

The important part isn’t all that though. The important part is the BTS W5 warrants. 

More below.

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Brief Industrials: TRACKING TRAFFIC/Chinese Express: December & Q4 Numbers Confirm Sharp Shift in Express Market Share and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. TRACKING TRAFFIC/Chinese Express: December & Q4 Numbers Confirm Sharp Shift in Express Market Share
  2. Lonking (3339 HK): A Cheap and Quality Pick for China’s Infrastructure Spending

1. TRACKING TRAFFIC/Chinese Express: December & Q4 Numbers Confirm Sharp Shift in Express Market Share

Dec exp asp

Headline express parcel delivery volume increased by 24.3% YoY in December, and average pricing increased by 1.9% YoY. In the main inter-city segment, which accounts for the bulk of the listed express companies’ business, volume growth was even stronger (+32.4% YoY). However, these headline figures fail to illustrate dramatic shifts in market share, and December’s nominal price increase contradicts what was reported by most companies.

Chinese express delivery leader S.F. Holding (002352 CH) reported another month of strong volume growth in December. SF grew far faster than its three China-listed peers in December, and in Q419 its parcel volumes grew significantly faster than any other listed express company. SF’s volume share gains appeared to accelerate during the fourth quarter.

We believe SF’s share gains are sustainable and unlikely to undermine profitability. Furthermore, it appears some smaller listed express companies may be stepping back from the battle for volume share. In our view, these developments are positive for SF. However, investors in recent months have failed to recognize these changes, and we retain our BUY rating on SF and our CNY 57.30 price target.

2. Lonking (3339 HK): A Cheap and Quality Pick for China’s Infrastructure Spending

Pb

Lonking Holdings (3339 HK) has been a laggard among the Chinese construction machinery companies in last year’s rally. However, we think that the company has excellent exposure to a recovery in China’s infrastructure spending, given its number one position in the wheel loader market in the country. 

We like Lonking’s quality management, willingness to reward shareholders, strong financial position and undemanding valuations. We estimate that the stock is now trading on just 5.9x PER and 11% dividend yield for FY20; and it is a cheap and quality alternative to peers including Sany Heavy Industry Co., (600031 CH) and Zoomlion Heavy Industry S A (000157 CH) which have run up by 102.3% and 92.2%, respectively, in last year.

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Brief Industrials: AP Moller Maersk (MAERSKb): Assessing the Stock Price Development and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. AP Moller Maersk (MAERSKb): Assessing the Stock Price Development
  2. Shanghai International Airport (600009 CH): Best of the Breed
  3. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?
  4. Philips to Divest Domestic Appliances Business – Potential for Margin Expansion
  5. Recruit Holdings 3Q Update: Risks Have Started to Materialise

1. AP Moller Maersk (MAERSKb): Assessing the Stock Price Development

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While the market was looking brighter in the latter half of 2019, when most of the liner companies posted profits, it has taken a U-turn since then. Stocks have been on a downwards trajectory since the beginning of 2020 amid the war rhetoric between the US and Iran in January and the negative news of the virus thereafter. In the short term, we expect volatility in liner company stock prices as the news flow surrounding the virus ebbs and flows; this also encourages investors to take positions in companies, including APMM which offers a favourable risk-reward.

2. Shanghai International Airport (600009 CH): Best of the Breed

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We regard Shanghai International Airport Co, Ltd. (600009 CH) (SIAC) as the best airport play in China when compared with its peers like Beijing Capital International Airport (BCIA) (694 HK) and Guangzhou Baiyun International Airport (600004 CH) given its strong competitive position, its exposure to international traffic growth in the long term and growth in non-aeronautical revenue. 

Despite its premium P/B valuation, SIAC has a better ROE and stronger profit outlook. We think this justifies the stock’s higher P/B valuation than BCIA. In earnings terms, however, it is the least expensive amongst its peers on FY21 PER. Its high international exposure may be clouded by the Novel Coronavirus Pnemonia (NCP) outbreak, but we expect SIAC to be best positioned for the revival in international traffic over the long term. 

3. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?

Lgchem

  • One of the big winning sectors in the Korean stock market this year has been the rechargeable batteries related stocks including Samsung Sdi (006400 KS) and LG Chem Ltd (051910 KS). In the past few days, there has been some increasing news flow in the local media regarding a potential transfer of the rechargeable batteries modules and packs business from LG Electronics (066570 KS) to LG Chem.
  • On a relative basis, this transfer would likely to have a GREATER POSITIVE impact on LG Electronics since the battery modules and packs business has been losing money in the past several years and this transfer would allow LG Electronics to reduce the operating losses from this business unit (Vehicle Component Solutions).
  • For now, nothing has been decided regarding the potential transfer of the rechargeable battery modules and packs business from LG Electronics to LG Chem. This is just in the discussion stage right now. However, this business transfer seems to make a lot of sense and one could wonder why they did not complete this move earlier (especially from the point of view of LG Electronics shareholders). 

4. Philips to Divest Domestic Appliances Business – Potential for Margin Expansion

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  • Dutch health technology company, Philips during its 4Q2019 results release, announced that it will be reviewing options for future ownership of its Domestic Appliance business.
  • The domestic appliance business is engaged in the sale of coffee machines, air purifiers and air fryers and the company has booked the domestic appliance business under its Personal Health Segment.
  • Philips has a long history of business restructuring where it previously divested/spun-off its semiconductor, TVs and lighting businesses in order to narrow down its focus on healthcare equipment and personal health products.
  • In this insight, we take a look at the company’s Domestic Appliance business, potential valuation and the impact on Philips’ revenue and margins.

5. Recruit Holdings 3Q Update: Risks Have Started to Materialise

Download

  • Recruit Holdings (6098 JP)’s 3Q FY03/20 results show early signs of the risks that we highlighted in our previous notes materialising. In our note, Global Labour Markets Are Starting to Slow Down – Time To “Lay Off” Recruit, we suggested that Recruit’s exposure to the Japanese and global labour markets is 84% and 71% of its consolidated revenue and EBITDA, hence, with global labour markets starting to slow down, and hiring stalls, Recruit’s growth could be hampered in the medium term. Recruit’s Staffing and HR Solutions revenue decreased by 3.3% YoY and 2.8% YoY respectively in FY03/20 (cf. +1.9% YoY and +7.7% YoY respectively in FY03/19). 
  • In our note, Recruit Holdings [Alternative Data]: Should the Slowdown in Indeed Warrant a Discount?, we suggested that revenue growth of the HR Technology segment, which operates indeed.com (Indeed) and glassdoor.com (Glassdoor), would fall below 30% YoY (22%-28% YoY) for the first time in 3Q FY03/20. HR Technology segment revenue increased by c.28% in 3Q FY03/20. We believe most of this growth is due to better monetisation efforts at Glassdoor which could be maxing out soon, hence, HR Technology revenue growth is likely to be even lower over the next few quarters. 
  • We didn’t find anything exciting to look forward to on the long side from Recruit’s 3Q FY03/20 results. We believe that the market would start discounting Recruit over the next few quarters as risks (that we have highlighted above) would become more obvious. Thus, with its valuation also at an all-time high, we believe it is a good time to short Recruit. 

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Brief Industrials: Lonking (3339 HK): A Cheap and Quality Pick for China’s Infrastructure Spending and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Lonking (3339 HK): A Cheap and Quality Pick for China’s Infrastructure Spending

1. Lonking (3339 HK): A Cheap and Quality Pick for China’s Infrastructure Spending

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Lonking Holdings (3339 HK) has been a laggard among the Chinese construction machinery companies in last year’s rally. However, we think that the company has excellent exposure to a recovery in China’s infrastructure spending, given its number one position in the wheel loader market in the country. 

We like Lonking’s quality management, willingness to reward shareholders, strong financial position and undemanding valuations. We estimate that the stock is now trading on just 5.9x PER and 11% dividend yield for FY20; and it is a cheap and quality alternative to peers including Sany Heavy Industry Co., (600031 CH) and Zoomlion Heavy Industry S A (000157 CH) which have run up by 102.3% and 92.2%, respectively, in last year.

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Brief Industrials: Shanghai International Airport (600009 CH): Best of the Breed and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Shanghai International Airport (600009 CH): Best of the Breed
  2. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?
  3. Philips to Divest Domestic Appliances Business – Potential for Margin Expansion
  4. Recruit Holdings 3Q Update: Risks Have Started to Materialise
  5. DP World Squeezeout – Governance Discount Deserved (And Served) So Minorities Lose

1. Shanghai International Airport (600009 CH): Best of the Breed

Spia

We regard Shanghai International Airport Co, Ltd. (600009 CH) (SIAC) as the best airport play in China when compared with its peers like Beijing Capital International Airport (BCIA) (694 HK) and Guangzhou Baiyun International Airport (600004 CH) given its strong competitive position, its exposure to international traffic growth in the long term and growth in non-aeronautical revenue. 

Despite its premium P/B valuation, SIAC has a better ROE and stronger profit outlook. We think this justifies the stock’s higher P/B valuation than BCIA. In earnings terms, however, it is the least expensive amongst its peers on FY21 PER. Its high international exposure may be clouded by the Novel Coronavirus Pnemonia (NCP) outbreak, but we expect SIAC to be best positioned for the revival in international traffic over the long term. 

2. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?

Lgchem

  • One of the big winning sectors in the Korean stock market this year has been the rechargeable batteries related stocks including Samsung Sdi (006400 KS) and LG Chem Ltd (051910 KS). In the past few days, there has been some increasing news flow in the local media regarding a potential transfer of the rechargeable batteries modules and packs business from LG Electronics (066570 KS) to LG Chem.
  • On a relative basis, this transfer would likely to have a GREATER POSITIVE impact on LG Electronics since the battery modules and packs business has been losing money in the past several years and this transfer would allow LG Electronics to reduce the operating losses from this business unit (Vehicle Component Solutions).
  • For now, nothing has been decided regarding the potential transfer of the rechargeable battery modules and packs business from LG Electronics to LG Chem. This is just in the discussion stage right now. However, this business transfer seems to make a lot of sense and one could wonder why they did not complete this move earlier (especially from the point of view of LG Electronics shareholders). 

3. Philips to Divest Domestic Appliances Business – Potential for Margin Expansion

Image 96443308921582011006431

  • Dutch health technology company, Philips during its 4Q2019 results release, announced that it will be reviewing options for future ownership of its Domestic Appliance business.
  • The domestic appliance business is engaged in the sale of coffee machines, air purifiers and air fryers and the company has booked the domestic appliance business under its Personal Health Segment.
  • Philips has a long history of business restructuring where it previously divested/spun-off its semiconductor, TVs and lighting businesses in order to narrow down its focus on healthcare equipment and personal health products.
  • In this insight, we take a look at the company’s Domestic Appliance business, potential valuation and the impact on Philips’ revenue and margins.

4. Recruit Holdings 3Q Update: Risks Have Started to Materialise

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  • Recruit Holdings (6098 JP)’s 3Q FY03/20 results show early signs of the risks that we highlighted in our previous notes materialising. In our note, Global Labour Markets Are Starting to Slow Down – Time To “Lay Off” Recruit, we suggested that Recruit’s exposure to the Japanese and global labour markets is 84% and 71% of its consolidated revenue and EBITDA, hence, with global labour markets starting to slow down, and hiring stalls, Recruit’s growth could be hampered in the medium term. Recruit’s Staffing and HR Solutions revenue decreased by 3.3% YoY and 2.8% YoY respectively in FY03/20 (cf. +1.9% YoY and +7.7% YoY respectively in FY03/19). 
  • In our note, Recruit Holdings [Alternative Data]: Should the Slowdown in Indeed Warrant a Discount?, we suggested that revenue growth of the HR Technology segment, which operates indeed.com (Indeed) and glassdoor.com (Glassdoor), would fall below 30% YoY (22%-28% YoY) for the first time in 3Q FY03/20. HR Technology segment revenue increased by c.28% in 3Q FY03/20. We believe most of this growth is due to better monetisation efforts at Glassdoor which could be maxing out soon, hence, HR Technology revenue growth is likely to be even lower over the next few quarters. 
  • We didn’t find anything exciting to look forward to on the long side from Recruit’s 3Q FY03/20 results. We believe that the market would start discounting Recruit over the next few quarters as risks (that we have highlighted above) would become more obvious. Thus, with its valuation also at an all-time high, we believe it is a good time to short Recruit. 

5. DP World Squeezeout – Governance Discount Deserved (And Served) So Minorities Lose

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Dubai-owned ports operator DP World has been a fixture in the M&A and offshore M&A space the last decade, with a dozen and a half transactions to its credit the last 5-6yrs – all but one a purchase (it sold Chilean Puertos y Logistica last year to a unit of Caisse de dépôt et placement du Québec). The goal has been to transition away from being a pure ports operator to become the world’s leading end-to-end logistics provider.

Occasionally its deals have made really public news, in particular the pre-IPO deal in 2006 to buy The Peninsular and Oriental Steam Navigation Company (P&O), a British-owned company which operated 5 major US ports (and 16 smaller ones) which was strongly supported by the Bush administration, questioned by the Coast Guard, then in Feb 06 approved by CFIUS. Then when a US partner of P&O saw they might get forced into a partnership with DPW, they raised the issue with their Democratic Party Congresspeople, who raised a stink. DPW offered to postpone. In early March, the US House voted overwhelmingly to block the deal via a bill, and the next day, DPW effectively withdrew its bid for ownership and said it would sell the package to a US entity. It was eventually bought by AIG.

The stock IPOed in November 2007 at US$1.30/share (equivalent to US$26/share; the stock underwent a 1:20 reverse split in 2011) and then fell like a rock. Four months after listing the stock was trading 40% lower. A year after that, at the lowest point in the GFC (early March 2009), the stock traded as low as 85% below the IPO price. 

The stock took the next nine years to (impressively) climb back up to IPO price-equivalent in January 2018 before falling back by half as of yesterday.

The NEW News

Earlier today, DP World (DPW DU) made an announcement that Port and Free Zone World, a wholly-owned subsidiary of state investment vehicle Dubai World, is set to acquire the 19.55% of DP World’s shares listed on the Nasdaq Dubai (the other 80.45% is owned by the SOE). 

The Offer Price is US$16.75, which is a 28.8% premium to Sunday’s closing price of US$13/share.

The statements by the CFO and CEO point to how taking a long-term view is optimal for the company, whereas markets take a short-term view. 

“The DP World Board has concluded that the disadvantages of maintaining a public listing outweigh the benefits. Delisting from Nasdaq Dubai is in the best interest of the company, enabling it to execute its medium to long-term strategy. DP World is focussed on the transformation of the Group and takes a long-term view of investment returns and value creation. In contrast, public markets typically hold a short-term view. As a result of this gap, the DP World strategy is not fully appreciated by the equity markets, and consequently is not reflected in the company’s share price performance.”
Yuvraj Narayan, Group Chief Financial, Strategy and Business Officer of DP World

“The global ports and logistics industry has been undergoing a significant transition as a result of the consolidation of the customer base and the vertical integration of several competitors. DP World must be able to continue responding effectively to this rapidly changing landscape and to invest in the future.

Returning to private ownership will free DP World from the demands of the public market for short term returns which are incompatible with this industry, and enable the company to focus on implementing our mid-to-long-term strategy to build the world’s leading logistics provider, backed by our globe-spanning network of ports, economic zones, industrial parks, feeders, and inland transportation.

Our focus will continue to be on integrating our acquisitions with our global network of interconnected ports, logistics businesses and economic zones. DP World’s world-spanning footprint puts us in a strong position to lead the disruption of the industry creating a better future for all cargo owners through smarter trade.”
Sultan Ahmed bin Sulayem, Group Chairman and Chief Executive Officer of DP World

The statements out are what they are. Investors can ignore them. That is not what is happening here. 

The powers that be in Dubai are squeezing minorities out at a huge discount to where these assets would trade if sold on their own. It is far, far below where peers trade.

The claim that public markets cannot support such a long-term business is strange.

  • The market supports Brookfield (either Brookfield Asset Management (BAM US) or Brookfield Infrastructure Partners Lp. (BIP US)) just fine.
  • And does so with higher than the six turns of 2020e EBITDA (the debt/EBITDA ratio which DPW would have post the leveraged buyout (after it takes on an additional $8.1bn of net debt to complete the transaction and pay back the acquirer).
  • Brookfield has higher debt multiples, and trades at 2-3x the EV/EBITDA ratio and similarly high multiples of EV/EBITDA less capex) compared to DPW (depending on how you measure Brookfield EV/EBITDA, and there should be some question about that).
  • DPW has better ROA, better ROE, better ROC, and better Net Income Margins than either of the Brookfield businesses. 

The difference, of course, is investor trust in management and board governance. Minorities were basically always stuck here. And just how stuck they are/always were is shown in the call presenting the deal. There were some unhappy campers.

It is not a pretty governance picture. 

More below.

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